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Decarbonization: Clarity on finance’s limits and superpowers.

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TLDR:

  • The conversation at the World Economic Forum in Davos has focused on the energy transition and meeting climate goals.
  • Finance is a vital piece of the puzzle, but more clarity is needed on what it can and cannot do.

Participants at the World Economic Forum in Davos have been discussing the energy transition and how to meet climate goals. Several technologies and innovations needed for the energy transition, such as renewables, electric vehicles, and battery storage, are already available. Private markets are adapting to the investment opportunities created by these developments, but more financial support is needed to accelerate progress. Finance can play a role in facilitating and providing capital for the transition, which can also lead to profitable opportunities for businesses. However, finance is not the sole driver of the transition and other factors, such as government policy and sustainable returns, are also important.

Government policy is crucial for a successful energy transition. Governments need to create regulatory frameworks and policy incentives that promote the transformation of local and regional economies, reskill workforces, and remove barriers to infrastructure development. Public policy support, such as carbon prices and subsidies, can be game-changers and make the transition economically viable. Public guarantees and instruments can also help draw in private capital for long-term projects.

In addition to government policy, green projects must deliver a good rate of return for financial institutions to invest. Banks and other financial providers have an obligation to generate sustainable returns while managing risks. Capital allocation to new energy sources should consider the customer base and potential return on investment. Financial structures that marry impact and returns, such as Alterra, the UAE’s $30 billion climate investment fund, are emerging with the help of governments and innovative financing techniques.

Overall, finance is an important component of the energy transition, but it is not the sole driver. Collaboration between public and private sectors is necessary to remove barriers to decarbonization and create conditions for finance to support and accelerate the transition.

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